At first glance the forces of premiumisation are on an unstoppable march.
Leading brands have insisted for over two decades that the bottom end of the market is moribund, and that rising sophistication coupled with a sustained provision of higher-end offerings were the future of the wine and spirits market. More recently, widespread references to austerity following the financial crash have played nicely into this narrative – in this zeitgeist, consumers cannot afford to drink more or the same, it is widely claimed, so they are drinking ‘less but better’.
However, hidden beneath the glamour of artisan labels and craft spirits brands, there is a very different and concurrent story to be told. While sommeliers continue to salivate over exorbitantly expensive Burgundy, the bulk wine industry is thriving. The consumption of low-priced (low-price and value price segments) wine is expected to rise by 1.1% in South Africa and 0.6% in Italy during the forecast period (CAGR 2018-2022), according to the IWSR’s data, with demand falling slightly in Germany, France, the US and China. Nevertheless, the forecast slump in demand is generally under 3%, with only China bucking the trend (-5.2%). Total global demand is forecast to decline by -0.5% – hardly a cataclysmic change.
While sommeliers continue to salivate over exorbitantly expensive Burgundy, the bulk wine industry is thriving.
Bulk wine now accounts for 40% of all wine exported globally and is worth more than €3,000m overall. South Africa is still predominately a bulk exporter of wine – the value of Spain and Italy’s bulk wine exports has also increased in recent times. The world’s supermarkets rely on entry level brands, both private label and independent, as important loss leaders. It is a vital part of their business model, as is repeated discounting and promotion-led marketing, much to the chagrin of the Champagne industry. It is unlikely that this segment of the market will simply evaporate anytime soon.
In addition, the consumption of low-priced spirits is expected to rise by a CAGR of 1.4% and 0.3% in India and South Korea respectively (2018-2022). The IWSR forecasts a global slump in demand of just -0.4%, indicating that the value-led spirits market is far from moribund. However, demand over the 2018-2022 period is predicted to fall by -2.2% in Russia, -2.7% in Brazil, -1.3% in Japan and -1.4% in the US. The IWSR forecasts suggest that demand will fall by -5.7% in Ukraine between 2018-2022, which could be attributed to the inherent instability of the region.
Of course, much will depend on the global economic situation over the next five years – the memory of the 2008 financial crash has not yet faded. Global consumption patterns do not mature in a vacuum; many economists believe that Europe, with slowing GDP growth rates, is on the verge of another recession. Moreover, cultural, gender and generational factors will undoubtedly have a decisive impact – for example, the rising tendency for young adults to shun alcohol due to health concerns and a fear of being demonised on social media. Alternatively, perhaps the constant and myopic fetishisation of premium and luxury offerings is pushing younger consumers away? If this trend continues, then one can imagine the bottom end of the market being more adversely affected, since mature adults are the main driver for sales of expensive wine and spirits.
Global consumption patterns do not mature in a vacuum.
Politics will also naturally play its part – state regulation of the alcohol market remains a divisive issue. “The introduction of the Alcohol Act in Ireland will reduce choice in retail channels and complicate logistics as importers will have to develop ’Ireland-specific’ labels which are required to include a cancer warning. This will be the first market in the world to introduce these kind of specifics on the label,” says Diego Talavera, international sales director at González Byass.
He continues: “The Irish alcohol market is expected to decline when the Public Health Alcohol Act is fully enacted, although we believe that value sales will increase.” Conversely, Ireland’s importers in the business of marketing premium labels are dreading the legislation’s potential to reduce demand for luxury brands, due to the inevitable price rises that burdensome logistics will bring. Wine and spirits remain very price-elastic commodities.
But from a global perspective, reaching a concise definition of the value market, and the dividing line between value and premium, is no easy task. In emerging markets such as India and sub-Saharan Africa, brands sold as premium choices may well be dismissed as budget labels by Western consumers. Indeed, the introduction of a ‘cheap’ imported brand into a market such as Nigeria is in fact an opportunity for consumers to significantly trade up, when compared to the daily staples of palm wine
and other domestic ‘homebrews’ that remain a key part of the African alcohol culture.
The Distell group’s success in the African markets provides an enlightening case study. Responsible for just under 32% of South Africa’s total wine production, the firm was created in 2000 through the mergers of Distillers Corporation (SA) Limited and Stellenbosch Farmers Winery Group Limited.
Its global wine portfolio is led by the Nederburg range, while 4th Street — the biggest wine brand in South Africa — continues to deliver double-digit growth in South Africa, Botswana, Namibia and Lesotho. These brands would be regarded as ‘cut-price’ in London, yet in many African markets they represent an aspiration leap towards premium consumption as part of an overall rise in standards of living.
In terms of export markets, South Africa’s growth on the world stage has also been impressive. It is now the eighth-largest producer of wine globally and is ranked 12th in terms of surface area under vines, with approximately 99,000 hectares. Yet for leading firms the problem is not a shrinking ‘value’ market, but stubborn price ceilings that hinder efforts to market brands above a certain price point in key export markets. The recurrent gripe in South Africa is a lack of premium image, rather than falling demand for lower-priced brands.
“Of exports, roughly 60% goes into the European region, which includes Russia. I believe that key industry players have done great work in expanding the wine consumer base; whether the industry can leverage this and create more value through trade-up is a key challenge and opportunity for all of us,” says KWV’s CEO Boyce Lloyd, another major wine producer.
His counterpart at rival firm DGB paints a more pessimistic picture. “If we do not get the necessary price increases, we might as well just shut up shop. It is time for the leading players in the industry to realise that South Africa must not be seen as the number one destination for cheap and cheerful wine,” says Greg Guy, DGB’s international director.
for many aspirational wine producers across the globe, the conundrum is how to achieve consistently higher prices, not a lack of interest in lower-priced products.
Ultimately, premiumisation is still a relevant phenomenon, enjoying surprising levels of momentum and boasting yet to be tapped potential. Nevertheless, for many aspirational wine producers across the globe, the conundrum is how to achieve consistently higher prices, not a lack of interest in lower-priced products.
Wineries involved in marketing artisan cava have been complaining for decades that the major conglomerates have distorted prices and enforced price ceilings in collaboration with the world’s supermarkets. As a result, many have left the appellation framework in favour of new designations in order to gain wider distribution of their (by cava standards) expensive sparkling wines. From their perspective, the foretold global decline of the value-led market isn’t a reality, it’s a fallacy.